VAT Compliance: A Guide

VAT compliance is an ongoing process. That’s important for any business to bear in mind because you have VAT obligations; you need to ensure that there are systems, processes, and oversight in place to ensure that those obligations continue to be met. 

This is especially important because global tax authorities are becoming increasingly sophisticated at detecting non-compliance through Tax Audits. Even accidental non-compliance could lead to serious penalties.

Therefore, all businesses, from sole traders to multinational corporations, need to understand how to become compliant and, critically, to stay VAT compliant. And because the global economy is now so interconnected, companies also need to appreciate that they potentially have value added tax compliance obligations in more than one country. 

How do I become VAT compliant?

To become compliant, you first need to be clear on exactly what your VAT obligations are. In most cases, once your taxable turnover exceeds the specified local threshold, you must register for VAT to be in the VAT system. 

But note that becoming VAT registered wherever you have an obligation to do so (and it may be in more than one country!) is only the first step.

Once registered for VAT, you are obliged to charge VAT and file regular, accurate VAT returns. You have to provide all required supporting documentation to the local tax office. And there are strict record-keeping guidelines. 

In addition, the precise VAT return format and submission deadline are different in each country, so you need to ensure you have specific local knowledge on VAT compliance. 

Who is liable for VAT?

Let’s first clarify our terminology. Almost all of us regularly pay VAT in the course of ordinary consumption. When we buy a movie ticket or a washing machine or hire a locksmith, there’s a good chance we will be charged VAT on those purchases.

Businesses incur VAT in the same way. When you buy copier paper for the office, hire a cleaning service, or entertain clients, some or all of those expenses will include VAT.

However, not all entities are obliged to charge VAT and issue VAT invoices. There are clearly defined circumstances under which an entity must register for VAT and then account for VAT on all applicable sales. (Note that a company may be registered for VAT but may supply certain goods or services that are zero-rated for VAT. In such cases, they do not charge VAT.)

Here are some common reasons why a company may be liable to register for VAT and ensure VAT compliance. 

VAT thresholds

Whether or not a business is liable for VAT is not determined by the business structure. The liability of sole trader VAT, SMMEs, and large corporations are determined by their taxable income. In most countries that have VAT, if an entity’s annual taxable income exceeds the local threshold, then it must register for VAT.

The VAT threshold varies from country to country and is subject to change. For example, in the UK, it is currently £85 000. Any business with an annual taxable turnover in the UK exceeding that amount must register for VAT with HMRC. Subsequently, the businesses must subsequently charge VAT and account for VAT on regular VAT returns.

Distance selling

Imports are often subject to a special VAT charge in the form of import VAT. However, e-commerce businesses selling to customers in the EU also need to be aware of specific distance selling regulations. As the EU has recently updated these rules, e-commerce businesses that sell to customers in Europe should consult a VAT specialist to ensure they are on top of the latest regulations.   

Digital services

Unlike tangible goods, you can’t charge VAT and slap on customs duties to digital services at the border. To create a more level playing field, many countries impose VAT on nonresident digital services companies. If you supply streaming, gaming, or other electronic services, it’s imperative that you understand your global VAT system compliance obligations. As digital services VAT thresholds and definitions vary by country, expert VAT advice can be especially useful.  

What if I voluntarily register for VAT?

In some cases, a company may choose to register for VAT even if it is not obliged to do so. However, it is important to recognize that once registered, you need to comply with all the requirements outlined above.

When it comes to VAT compliance, you cannot pick and choose. All VAT registered entities are required to fully and comprehensively account for VAT.

For this reason, a business that is not obliged to register for VAT should carefully weigh up the benefits and disadvantages of becoming VAT registered. 

Closing the VAT gap

Tax authorities are increasingly concerned about the VAT gap. The VAT gap refers to the expected VAT revenue compared to the actual revenue collected. In a recent report, the EU revealed that its member states lost an estimated €134 billion VAT in 2019.

Why is this significant for your company’s VAT compliance? Because authorities are taking concrete steps to close the VAT gap, implementing high-tech systems to detect and punish VAT evasion. 

For this reason, businesses need to be especially vigilant about VAT compliance, carefully assessing if they understand their global VAT compliance obligations and whether their processes are up to the task of ongoing compliance. 

Measures to close the VAT gap also affect the practice of VAT compliance. To detect noncompliance, many authorities have introduced digital VAT requirements, such as real-time reporting and e-invoicing. To comply with digital VAT requirements - such as the UK’s Making Tax Digital for VAT - you need appropriate compliance VAT software in place. Fortunately, studies show that with the right compliance software, submitting VAT returns electronically is more efficient and cost-effective.  

What makes a valid VAT invoice?

For most transactions, VAT registered companies must issue a full VAT invoice. This will generally include the following:

• Name and address of the business
• VAT number
• Name and address of customer
• The price is inclusive and exclusive of VAT
• The VAT rate per line item

The invoice will also include a description of the goods or services. You may also have the option of issuing simplified invoices for lower-value goods or services, depending on the local regulations. While these requirements may sound complicated, effective VAT compliance automates the process, ensuring your invoices are always compliant. 

Tax authority requires businesses to securely store invoices for a defined time period. A proven invoice storage solution is, therefore, another important component of ensuring you remain compliant. 

What is the impact of VAT on a business?

There is no question that VAT creates an additional administrative burden for any business. VAT compliance is complex, regulations are subject to change, and different countries have subtly different rules. For these reasons, outsourcing VAT compliance to specialists is often the best way to optimize compliance and avoid VAT surcharge rates.

However, it is an error to see VAT registration as just an administrative burden. Being VAT registered also provides important business opportunities. Crucially, only VAT registered businesses can reclaim VAT. In addition, once you are registered for VAT, you can take advantage of advanced mechanisms that provide significant cash flow relief, such as deferred import VAT.

Therefore, VAT compliance and VAT recovery should not be seen as two unconnected business activities. Rather, you should look to integrate your overall business strategy to optimize cash flow, maximize VAT recovery and ensure you are always compliant in every market in which you do business.

As the world’s leading VAT compliance and recovery business, VAT IT can provide a customized technology-driven total VAT solution for your business. Get in touch for a free expert consultation.